Deutsche Bank conference: Casino recovery appears sustainable David McKee, CDC Gaming Reports · November 23, 2021 at 8:38 pm Investors turned out in droves for the Deutsche Bank Gaming, Lodging, Leisure & Restaurant Conference in Miami, an estimated 60 percent more attendees than in 2019. Lead Deutsche Bank analyst Carlo Santarelli hailed this as “a favorable signal for corporate travel.” Recapping the conference, Santarelli turned first to the Las Vegas Strip, where operators believe a revival in group business is crucial to a sustained recovery. “It is likely, in our view, that the leisure strength and casino customer spend levels will struggle to maintain current run rates.” Group bookings for next year were described as strong on the whole, although hampered by some international travel restrictions and “hesitancy” on the domestic front. For example, attendance at Consumer Electronics Show is expected to be half of what it was in 2019. Operators differed on whether cash flow and profit margins on the Strip could be sustained at current levels, particularly as consumer spending normalizes and hiring ramps up. Casinos aren’t, however, planning to return to pre-pandemic employment levels. Currently running at 70 percent of 2019 staffing, Santarelli reports that the plans are to staff up to no more than 85 percent. Bright spots included the return of baccarat play, which exceeded third-quarter numbers from two years ago. Also, the availability of The Mirage and one Caesars Entertainment resort was seen as providing a tailwind for their operators. “We believe a relatively deep buyer pool remains,” Santarelli said, “given the levels of interest in the recent transactions and the handful of operators who remain interested in getting into or expanding their presence on the Strip.” Favorable commentary was strongest on the Las Vegas locals segment, due in part to a rational promotional climate, “efficient labor/amenities management, and sustainable margin profiles.” Station Casinos, traditionally the leader in promotions, was noted to have dialed back marketing significantly, causing competitors to follow suit. Costs are not, however, stable. The current supply chain crisis is negatively affecting food and beverage budgets. More significantly, perhaps, competition for workers is driving wages upward, sometimes as much as 25 percent. (This is not an issue for Strip casinos, where pay is generally regulated by collective bargaining agreements.) This has a silver lining for, as Santarelli observed, “the impact of higher wages in other sectors has and is expected to continue to have a favorable impact on LV locals gaming revenue.” Gaming operators were relatively disinclined to discuss regional casinos, although not for any particularly bad news on that front. Santarelli predicted a revenue slowdown beginning this month, as casinos return to normal seasonal patterns of business and away from “the onslaught of pent-up demand.” He did point out that Michigan, Pennsylvania, and New Jersey were lagging other regional jurisdictions, which he blamed on their substantial igaming footprints. Regionally, upward pressure on wages was being felt, as labor costs accounted for “roughly 40% of non-gaming tax-related expenses for regional operators. Ultimately, we believe the addition of employees will have a more pronounced effect, in 2022, than will labor inflation for the regional operators.” Baby Boomers are on the way back to gaming floors, although cultural and political differences come into play. “One operator noted that it has seen a distinct difference in the return of the older patron between blue and red states, with red states seeing a more pronounced return of the older patron.” Promotion spend is “relatively tame,” although one outlying operator was aggressively escalating its marketing. Competitors, however, were not following suit. As for igaming, operators were deeply divided, with some predicting that it would spread to only a few states over the next several years, while others foresaw a rush, with 15 to 20 states legalizing in the next five years. “We believe,” wrote Sanatarelli, “that support for more legalization is tethered to views around responsible gaming, concerns around cannibalization, and state budget needs, as gaming remains, in the words of one CEO, a ‘break glass in case of an emergency’ lever to pull for states when budget issues arise.” Participants, however, agreed that margins for igaming were far superior to those for sports betting. Optimism characterized the manufacturing sector, albeit with a slight abeyance. A major replacement cycle for gaming equipment is forecast, but not until the latter half of next year. Revenue-sharing games were said to have “rebounded nicely … as operators leaned into leased content during the tighter budget period coming out of the pandemic.” However, the consensus was that operators would look to shore up profit margins by buying more games outright and thereby owning all the revenue. Macau was almost an afterthought, rife with questions whose answers Santarelli called “elusive.” Casino managements asserted that the mid-September official proclamations, which included the appointment of government overseers for casinos, were “in line with their expectations and largely unremarkable, despite the [adverse] stock action and subsequent dialogue stemming from the commentary.” They did concede that non-gaming attractions would now be the governmentally preferred use of capital. Operators viewed concession extensions as “likely” and that the rules governing the new tenders (which may have half the length of the outgoing ones) will be promulgated in the first quarter of next year. As for the return of Chinese customers, that was one of the enigmas of the session. It may not be until after the Beijing Olympics or when vaccination rates — currently at 70 percent — reach 90 percent or after elections have been held. Despite that uncertainty, operators were upbeat about the eventual future, pointing out that during the few periods of relaxed access to Macau, premium mass play (the most important sector) was at 90 percent of 2019 action.